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Describe issues the auditor should consider when determining which locations to visit to physically observe the client’s inventory count.

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Below are four independent client scenarios: 1. Food Giant is a regional grocery store chain located in the Pacific Northwest. Rather than operate a company-owned distribution center, Food Giant uses five different in- dependent storage warehouse companies across the region to store most of its gro- cery inventory before shipping to the individual stores. Typically, […]

During your observation of the inventory count in the main warehouse, you found that most of the prenumbered tags that had been incorrectly filled out are being de- stroyed and thrown away. What is the significance of this procedure and what action should you take?

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Latner Shoe Distributor Company maintains a large portion of the shoe merchandise in 10 warehouses throughout the eastern United States. This ensures swift delivery service for its chain of stores. You are assigned alone to the Boston warehouse to observe the physical inventory process. You encountered the following situations during the December 31, 2019, physical […]

What level of understanding does the auditor need to have regarding the nature of work performed by the specialist?

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Auditors are required to understand the client’s industry and business but may not be experts in identifying the quantity and value of certain inventory items. For example, consider observing a physical inventory and testing inventory valuation for a client that mines rare gems. In such cases, auditors may use a specialist to assist in testing […]

Why should the auditor review the cost accounting records and test their accuracy?

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The cost accounting records are often an essential area to audit in a manufacturing or construction company. a. Why should the auditor review the cost accounting records and test their accuracy? b. For the audit of standard cost accounting records in which 35 parts are manufactured, explain how you would determine whether each of the […]

Does the receiving department prepare prenumbered receiving reports and account for the numbers periodically for all inventory received, showing the description and quantity of materials?

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Items 1 through 8 are selected questions typically found in questionnaires used by auditors to obtain an understanding of internal control in the inventory and warehousing cycle. In using the questionnaire for a client, a “yes” response to a question indicates a possible internal control, whereas a “no” indicates a potential deficiency. 1. Does the […]

The auditor traced the test counts to the client’s inventory listing. This procedure likely obtained evidence about which balance-related audit objective for inventory?

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The following questions deal with tests of details of balances and substantive analytical procedures for inventory. Choose the best response. a. An auditor selected items for test counts while observing a client’s physical inventory. The auditor traced the test counts to the client’s inventory listing. This procedure likely obtained evidence about which balance-related audit objective […]

Which of the following internal control procedures most likely would be used to maintain accurate inventory records?

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The following questions concern internal controls, and the testing of internal controls, in the inventory and warehousing cycle. Choose the best response. a. For control purposes, the quantities of materials ordered may be omitted from the copy of the purchase order that is (1) returned to the requisitioner. (2) forwarded to the receiving department. (3) […]

Explain why a proper cutoff of purchases and sales is heavily dependent on the physical inventory observation. What information should be obtained during the physical count to ensure that cutoff is accurate?

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1. Explain why a proper cutoff of purchases and sales is heavily dependent on the physical inventory observation. What information should be obtained during the physical count to ensure that cutoff is accurate? 2. A client applies manufacturing overhead to inventory on the basis of $3.47 per direct labor hour. Explain how the auditor will […]

Why is the balance-related presentation audit objective so important for stock-based compensation?

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Chief executive officer compensation can be a material amount and is often scrutinized by regulators, analysts, competitors, and investors. For CEOs of pub- licly traded companies, compensation can consist of salary, bonus, stock option grants, or other stock awards that can be restricted in terms of how long the officers and directors are required to […]

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